IRS’ New Rules for the Treatment of Individual Chapter 11 Debtors’ Income
by David N. Crapo
Gibbons, Del Deo, Dolan, Griffinger & Vecchione P.C.; Newark, N.J.
Section 321 of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat 23 (2005), amended the Bankruptcy Code to add a new §1115, which governs chapter 11 cases filed by individuals on or after Oct. 17, 2005. Section 1115 expands the scope of individual debtors’ chapter 11 bankruptcy estate to include (a) the debtor’s earnings from post-petition services and (b) most property acquired by the debtor post-petition, including income-producing property. The enactment of §1115 effected a significant change in the law. Previously, as a general rule, post-petition earnings and property acquired post-petition were excluded from the bankruptcy estates of individual chapter 11 debtors. See, e.g., In re Fitzsimmons, 725 F.2d 1208 (9th Cir. 1984).
Chapter 13 Trustee May Seek to Recover the Non-Exempt Portion of a Federal Income Tax Refund for the Benefit of Creditors
by David Howard Stein
Duane Morris LLP; Newark, N.J.
The circuit court in In the Matter of Meza, 2006 U.S. App. LEXIS 26304 (5th Cir. Oct. 16, 2006), held that a chapter 13 trustee may move to modify a debtors’ chapter 13 plan to utilize the nonexempt portion of the debtors’ federal income tax refund received following confirmation of the chapter 13 plan, even though the debtors satisfied the unpaid plan balance while the trustee’s request for the modification was pending.
Eleventh Circuit Court of Appeals Addresses Effective Date of Plan Impact on IRS Assessment of Taxes after Confirmation Date
by Mychal A. Bruggeman
Mackall, Crounse & Moore PLC; Minneapolis
In United States v. White, 466 F.3d 1241 (11th Cir. 2006), the circuit court held that an “effective date” established for a chapter 11 plan that occurred two months after the date of the plan’s confirmation did not alter the date of the taxpayer’s discharge, and therefore the Internal Revenue Service (IRS) could assess additional taxes immediately after the confirmation date. Such an assessment was not against the property of the estate, but against the taxpayer himself.
How to Eliminate Trustee Tax Liability Resulting from the Administration of a Chapter 7 Case
by Fred Dery
Fred J. Dery & Associates PC; Troy, Mich.
Trustees were previously required to wait seven years after filing a tax return before distributing money to creditors. Seven years is the statutory period the Internal Revenue Service (IRS) has to audit an income tax return after it is filed. If the IRS did not audit the return during the seven-year period, the return was considered accepted as filed and the IRS could not assess any additional tax against the trustee or the estate. It became apparent to the IRS that distributions to creditors were being slowed down because of this seven-year requirement. The IRS was experiencing a delay in payments they were to receive from an estate and they were hampered in pursuing collection activities against individuals who might be individually liable for estate tax liabilities (i.e., trust fund taxes). To speed up the payment of creditor distributions by the bankruptcy, the IRS formulated Revenue Procedure 76-23 titled “Regarding Prompt Determinations.” This was in place for several years until the enactment of the new bankruptcy law on Oct. 17, 2005. To update the revenue procedure regarding prompt determinations, the IRS enacted Revenue Procedure 2006-24. The purpose and intent of this procedure is to accelerate the payments to creditors and to assist the trustee in closing out their cases on a timely basis.
Minutes from 2006 Winter Leadership Conference
The Bankruptcy Taxation Committee met on Friday, Dec. 1, 2006, in Scottsdale, Ariz., at ABI’s Winter Leadership Conference. Eric L. Pruitt opened the meeting with brief remarks concerning the committee's online newsletter, upcoming events and opportunities for members to participate by writing newsletter articles or providing topics for future meetings. The Panelists were Rachael Zepeda, senior attorney with the office of chief counsel for the Internal Revenue Service; Bill Unger, insolvency group manager and revenue officer for the IRS; Dennis Bean, Certified Public Accountant and Certified Reorganization Advisor with Dennis Bean & Co.; and Christopher Bayley, a partner in the Phoenix office of Snell & Wilmer LLP.
Ms. Zepeda provided an overview presentation of various tax aspects of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which covered 10 highlighted areas of the law.
Conceding that the IRS is cumbersome, Mr. Unger discussed the topic of "How to Deal with the IRS" and focused on various aspects and changes in the centralized insolvency program.
Mr. Bean's presentation included a thorough analysis of the IRS offer-in-compromise program. Mr. Bean noted his impression that the IRS is getting tougher on offers in compromise.
Covering "hot topics" and recent cases, Mr. Bayley provided an overview of several significant cases in the bankruptcy taxation area of interest from the prior six-month period.
Mr. Pruitt opened the floor for general discussion and comment. Joe Peiffer discussed a recent case of first impression, In re Knudsen, No. 05-03136, 2006 Bankr. LEXIS 3179 (Bankr. N.D. Iowa Nov. 20, 2006), which addressed 11 U.S.C. §1222(a)(2)(A) and allows income taxes occasioned by the sale of farm assets used in the debtor’s farming operation to be crammed down by treating them as unsecured claims and not priority claims.
The next meeting of the Bankruptcy Taxation Committee is scheduled to coincide with ABI’s 2007 Annual Spring Meeting, April 12-15, 2007, in Washington, D.C.